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Fintech on Friday: Robo-advisers and the future of financial planning

By Sharmil Patwa, Managing Director, Opus Una

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by Opus Una
| 07/09/2020 12:00:00

Robo-advisers must identify new revenue streams and find an efficient balance between automated services and human interaction if they are to become commercially successful

Despite much recent hype about the rise of the robots, an expected explosion in the use of robo-advisers has not yet materialised. The main stumbling block in the UK market has been a prohibitively high client acquisition cost, relative to a client’s lifetime value. 

The traditional financial planning process is time consuming and expensive in the UK, with an average hourly charge of £150 ($198) per hour, according to the Money Advice Service. Many of us are in the midst of complex life events and have much to gain from financial planning, but do not have high asset levels. For such potential clients, these services are often not affordable. 

Brighter future
But there is hope on the horizon. A traditional process, not designed for the digital mobile world, can potentially be transformed by initiatives such as open banking, which facilitates automation of clients’ asset data. Much of the time-consuming fact-finding process can now be achieved electronically and does not necessarily have to be completed in one session.

This financial planning dialogue, whether digital or physical, must embrace forecasts of the client’s cashflows and how they are impacted by certain life events. This largely quantitative, time-intensive process, lends itself to automation, which can be enhanced through design of a richer, more engaging and interactive user experience. 

Ensuring continued, compliant customer engagement is a challenge. But the process to confirm whether circumstances or goals have changed can increasingly be digitised. Where a physical meeting is required, technology can facilitate virtual meetings and save on travel time and office costs. It is essential to make these changes for disenfranchised investors, as traditional models to ensure suitability compliance have not proved cost-effective. 

Long way to go
Currently, total UK managed wealth is worth approximately £1tn, according to LEK Consulting. Yet between them, the UK’s four largest robo-advisers oversee less than 1 per cent of these assets. With core revenue models based on asset levels, but with relatively low AuM, the identification of new revenue streams will be key to their future commercial success. 

Nutmeg launched its fixed fee (£575) restricted advice proposition in 2018. Those who avail of the service are given a comprehensive financial plan and a digital tool is provided for those comfortable with a ‘self-serve’ proposition. 

Restricted advice from WealthSimple is limited to ETFs and mutual funds. A planning service is provided for clients with more than £100,000 in assets. Portfolio monitoring and a monthly adviser call are included for those with more than £500,000.

MoneyFarm also provides restricted advice, but does not appear to conduct a full fact find or provide recommendations. Scalable Capital offers advice for a £200 fixed fee. While not resulting in a financial plan, the service provides a suitability report and recommendation. Like Nutmeg, it includes a retirement planning calculator. 

Tech takes the strain
Applying improved technology in order to decrease service cost will also help define these robo-advice propositions. This techno-shift needs to be combined with an increase in the lifetime value of the client by offering other value-added products and services, such as planning. 

Many quantitative and data collection aspects of financial planning can be automated very successfully. Digital wealth managers are well-positioned for this change as they already offer several key advantages. These include: technology architecture that lends itself to easy adaptation; a digital-friendly client base; a wealth of client data; a discretionary fund management infrastructure to support the execution of financial plans; and the required regulatory permissions. 

Financial planning is an area of wealth management that is on the edge of dramatic digitalisation. Technology can reduce costs, improve engagement, improve the quality of financial plans and help to ensure compliance. The larger robos are responding in different ways. Nutmeg recognises that offering a planning service creates additional revenue opportunities and can also support attracting new clients and their assets. MoneyFarm’s intention, on the other hand, seems to be to give prospects the confidence to invest via ‘guidance’. 

The challenge is that while technology exists to make the quantitative parts of the process far more efficient and well controlled, there are qualitative parts to the process where a human touch is required. It is these, harder-to-automate pieces, which are currently prohibitively expensive to provide. The robos that succeed in this space will be those that get the balance right, accurately understand the advice needs of their clients and invest further in technology to reduce cost to serve.

Sharmil Patwa is founder of wealth management transformation consultancy Opus Una and was a judge for PWM’s Wealth Tech Awards 2020

To read the full article on PWM, click here.

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